JOHANNESBURG — Amid South Africa’s recession, the unwillingness of President Jacob Zuma to resign and the junk downgrades; you may be considering cashing in your preservation fund and even moving it offshore. But if you do this before retirement age, there are serious tax considerations to follow — it’s really about weighing up the investment trade off. In this piece, Candice Paine outlines the options – a must read for anybody looking to go this route. – Gareth van Zyl
By Candice Paine*
Understandably many South Africans are worried about their pension monies. In the light of corruption, downgrades, pedestrian JSE returns, ZAR devaluations and whisperings about prescribed assets, more and more investors are asking – but what about my pension money? Should I be moving it offshore and away from prescription?
Here, I am focusing particularly on preservation funds as short of resigning from your job, you can’t access your current employer’s pension/provident funds and your RAs are tied up under most circumstances until you are at least 55 years old.
The tax vs investment return trade-off
The biggest hurdle to liquidating pension or provident preservation funds is tax. The tax is material and should not be taken lightly.
You have two opportunities to access preservation fund money. One is before the age of retirement and is then called a withdrawal, whilst the other is at retirement when, if you have a pension preservation fund you are obliged to use two-thirds of the fund to purchase an annuity.
|PRE-RETIREMENT AGE i.e. <55yrs for Provident and Pension Preservation|
|Withdrawal allowed||Up to 100%|
|Tax table used||Withdrawal tax tables|
|Taxable income (R)||Rate of tax (R)|
|0 – 25 000||0%|
|25 001 – 660 000||18% of taxable income above 25 000|
|660 001 – 990 000||114 300 + 27% of taxable income above 660 000|
|990 001 and above||203 400 + 36% of taxable income above 990 000|
|AT RETIREMENT i.e. >55yrs or according to fund rules|
|Provident Preservation||Pension Preservation|
|Withdrawal allowed||Up to 100%||1/3 in cash|
|Tax tables||Retirement tax tables|
|Taxable income (R)||Rate of tax|
|0 – 500 000*||0% of taxable income|
|500 001 – 700 000||18% of taxable income above 500 000|
|700 001 – 1 050 000||36 000 + 27% of taxable income above 700 000|
|1 050 001 and above||130 500 + 36% of taxable income above 1 050 000|
*Note, if you have received a severance benefit, you may have already used up your R500k tax free allowance. Check with your practitioner. Please note if using the tables above the amounts are based on cumulative lump-sums.
Before deciding to just pay the tax, do the maths. Also calculate how much performance you will require from offshore investments together with ZAR depreciation to break even. This becomes a very personal decision and a function of how much time you have.
Retirement funds, whilst not the panacea to all tax and retirement funding issues, do have many advantages which you should be aware of before deciding to withdrawal from yours:
- You will have received tax relief on your initial contributions
- Growth in the fund is tax free i.e. no capital gains tax, no dividends withholding tax and no income tax. This has a fantastic compounding effect over time especially the longer you hold it for.
- You may nominate beneficiaries for your preservation funds (subject to trustee approval)
- Preservation funds do not attract estate duty or executor’s fees.
- Once you retire from the fund and start drawing money from an annuity, you will then be taxed as per the tax tables.
- Growth in an annuity (i.e. capital, dividends and income) is once again tax free.
In exchange for these tax benefits however, pre-retirement pension fund savings in South Africa are subject to regulation 28 of the pension fund act which prescribes how you are to invest your capital. Broadly there is a limit of 75% equities, 25% offshore investments and 25% listed property. People who are wanting to move pension money offshore would be particularly concerned by the 25% offshore limit. If this limit was higher, investors could use ZAR-denominated offshore funds to gain that much needed offshore diversification as well as a rand hedge.
At retirement age, you can access 100% of your provident preservation fund. With pension preservation funds, you must invest 2/3rds of the proceeds into an annuity. The good news here is that post-retirement, there are no investment restrictions. This means you are able to invest 100% of the capital in ZAR-denominated offshore funds. And in the annuity, once again you pay no tax on capital gains, dividends or interest income.
If you are seriously considering emigrating, you need to plan carefully. Currently the restrictions as to how much money you are able to take out of the country as an individual and a family are relatively large and should pose no limits for most people.
Capital in your pre-retirement funds can be accessed in the same way as we discussed above. You will pay tax according to the withdrawal tables (or retirement tables) after which the proceeds are yours to do with as you wish. However, if you have an annuity or are just about to retire from your pension preservation fund you can only access 2/3rds of the capital and the remainder must go towards purchasing an annuity which will have to remain in South Africa.
Once you have formerly emigrated, you can receive the annuity on a monthly or annual basis. You’ll need to use a blocked rand account to repatriate the money to your new country of residence. This is costly and not ideal.
There is no straightforward answer
There are very many advantages to saving in retirement funding vehicles. However, legislation makes it difficult and extremely costly to access this capital except for the purpose to which it was intended – which is to pay you an annuity in South Africa from retirement onwards.
Using the tax tables above you can do a quick calculation as to the tax you’ll pay to access capital. This amount will be onerous and is intended to dissuade you from accessing the money. Be sure of your intentions and why you are wanting to access the money before paying this toll.
Wisely structuring your financial affairs with the help of a good advisor can assist you in structuring all your assets in a way which is most beneficial from a tax (including estate duty) and investment return perspective without unduly destroying value.
The thing about financial planning is that it’s never one size fits all. We all have different lives. Seek advice and don’t let money be the problem.
- Candice Paine (CFA, CFP) is an independent financial planner.